Investment Capabilities & Performance

Financial markets experienced greater volatility in 2004 than in 2003 largely because of the rise in oil prices and continued geopolitical instability. Still, most equity markets made progress with strong gains seen in fourth quarter as falling oil prices and a clear-cut US election result increased investor confidence. Most actively managed global and regional equity portfolios outperformed for the quarter and for the full-year 2004. The Global Equity composite outperformed its benchmark over the quarter due to strong stock selection, particularly in the US markets, but performed marginally below benchmark (after fees) for the year.

Most global bond markets recorded total returns for 2004 well in excess of cash returns. In fourth quarter, European markets outperformed US Treasuries as yield movements reflected divergent prospects for growth and the relative weakness of the US dollar. Non-government bonds continued to prosper in every major market as they were supported by a stable economic outlook and demand for higher yielding securities. Our Global Bond composite performed just below its benchmark in 2004.

Asset allocation mandates benefited from strong returns across equities worldwide, especially in emerging markets. Stock selection contributed positively in US and emerging equities and US bonds. Currency strategy had a neutral effect on performance, as positive results from an underweight of US dollars in favor of Asian currencies were offset by an underweight in the appreciating UK sterling. Longer-term returns against benchmark remain positive.

In alternative and quantitative investments, performance was generally positive in 2004. All key equity-oriented strategies recorded positive returns, while a difficult macroeconomic environment contributed to slightly negative returns for our “macro” trading strategy. The fourth quarter saw continued mixed trading conditions for hedge funds, with returns mainly positive. Merger arbitrage strategies reported strong performance during the quarter, while strategies based on quantitative models generally finished flat. Performance for other equity and arbitrage strategies was positive. A difficult macroeconomic environment contributed to negative returns for our “macro” trading strategy for the quarter. The multi-manager teams were able to generate profits from most strategies, with strong funds of hedge fund performance during the quarter.

Real estate investments performed well during 2004.

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